Mix Of Cash Research Articles

Capital structure and the optimal payment methods in acquisitions

Based on a trade-off model of capital structure with immediate liquidation, and infinite debt maturity, we analyze the impact of prior-to-acquisition leverage levels on the optimal payment method used in an acquisition. Consistent with existing empirical studies, our model optimally yields three payment methods: Full cash, full equity, and a mix of cash and equity. The optimal level of cash in the transaction stems from the interplay between the magnitude of leverage deficit of one or both firms and the scale of synergies, in particular financial, that can be reaped from the acquisition. Finally, we emphasize the key role played by the capital structure of the target firm.

The strategic choice of payment method in corporate acquisitions: The role of collective bargaining against unionized workers

Abstract Acquirers facing strong union power tend to acquire target firms with cash rather than equity or a mix of cash and equity. A one standard deviation increase in the union power faced by the acquirer increases the odds of choosing cash payment by a factor ranging from 1.26 to 1.57. The effect is stronger when: the acquiring firm is located in states without the right-to-work laws; the interests of managers are more aligned with shareholders in acquiring firms; and acquiring firms’ asset specificity is high. When union power is strong, acquirers making cash payment are associated with a significantly positive announcement return. In addition, they are less likely to experience labor strikes or declines in operating performance, and more likely to obtain wage concessions in collective bargaining in the post-acquisition period than acquirers using other methods of payment. These findings suggest that cash payment allows acquirers to reduce excess liquidity and strengthen their bargaining power with unions.

Intellectual Property Contracts: Theory and Evidence from Screenplay Sales

This paper presents a model of intellectual property contracts. We explain why many intellectual property contracts are contingent on eventual production or success, even without moral hazard on the part of risk-averse sellers. The explanation is based on differences of opinion between buyers and sellers, and reputation building through multiple transactions. Our model predicts that more reputable sellers will be offered a very different mix of cash and contingency payments than inexperienced sellers. We also discuss the probability of sales as a function of seller and product characteristics. The theoretical model is tested on a data base of screenplay contracts.

CEO compensation and the reported value of stock options in initial public offerings

Purpose – This paper aims to test the effects that different compensation policies have on managerial discretion with regard to stock options. Design/methodology/approach – Hand-collected data from Securities and Exchange Commission registration statements are used to analyze the effects of chief executive officer (CEO) compensation policies on managerial discretion used in valuing stock options. Findings – This paper provides evidence that during the height of the initial public offering (IPO) bubble, CEO pay was associated with the undervaluation of stock options by IPO firms. The discretion varies with the relative mix of cash vs stock-based compensation. Firms with higher cash compensation tend to undervalue the unobservable market price of pre-IPO shares, leading to lower option values and a lower likelihood of reporting in-the-money options. Firms with greater stock-based compensation understate stock volatility, resulting in lower measures of the time-value component of options. Practical implications – The results provide evidence that firms attempted to disguise the true value of CEO pay when making IPOs. By disguising the value of options granted to the CEO, outsiders were not aware of the actual cost incurred and the true value of the company. Originality/value – This paper is the first to document that IPO firms understate the non-observable market price of pre-IPO shares to manipulate the value of stock options. It also documents the effect of discretion in estimates of volatility on stock options and the link between this discretion and CEO compensation.

Defined by Dictum: The Geography of Revlon-Land in Cash and Mixed Consideration Transactions

Anyone familiar with corporate law knows well how much of that law has been shaped by just one state: Delaware. Less obvious, however, is that so much of Delaware corporate law has been defined by the nonbinding dictum of that state’s judges. To illustrate this point, this Article considers the central role of dictum in the evolving doctrine first articulated by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. And in doing so, this Article refutes the thesis, recently advanced by Professor Stephen Bainbridge, that a judicial concern for director conflicts of interests, alone, is what animates the Revlon doctrine. Employing a conflict-of-interests understanding of Revlon, Bainbridge decries a string of Delaware Chancery Court opinions that have applied Revlon to transactions in which a target corporation is sold for cash or a mix of cash and stock in a publicly traded, diffusely held acquirer. In constructing his critique, however, Bainbridge overstates the chancery court precedent with which he takes issue as well as the supreme court precedent upon which he bases his conflict-of-interests thesis. In reality, the boundaries of Revlon-land are murky. Left uncertain by Delaware Supreme Court precedent, the scope of the Revlon doctrine has been purposefully, but cautiously, defined by the Delaware Chancery Court through the use of dictum.

What Does it Mean for an Executive to 'Make' $1 Million?

The press and other third-party observers frequently discuss executive compensation. However, executive compensation figures are not always what they seem. Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value. Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value. We discuss the applicability of each, illustrating concepts with real examples and summary statistics.Why don't companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Monetary aggregates and the business cycle

A monetary aggregate consisting predominantly of zero-maturity deposits, called MZM, tends to systematically lead output in the US business cycle. Such fluctuations are observed both before and after the 1979 monetary policy change. Similar dynamics are obtained in a model with multi-stage production and purchase-size heterogeneity when agents optimally choose their mix of cash, checkable, and time deposits used in transactions. The causality in the model runs from real activity to money, rather than the other way around. Although the monetary base is endogenous, through a Taylor-type rule, the lead in MZM is primarily driven by deposit creation.

Where Does it Go? Spending by the Financially Constrained

In this paper, we analyze the spending decisions of over 1.5 million Americans who vary in their degree of revealed credit constraints. Specifically, we analyze how these Americans spend their income tax refunds, using transaction-level data from a stored-value card product. Card-holders may choose among several tax settlement and loan options, effectively receiving cash as much as 90 days earlier than would have been possible without a settlement product. Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints.

Mitigating the Negative Market Reaction Associated with Acquisition Announcements by Cash-Rich Firms

Managers of cash-rich firms who are contemplating an acquisition face a dilemma. On the one hand, if they finance the acquisition with cash, the market could presume that they undertake the acquisition simply because the firm has excess cash (the free cash flow hypothesis). On the other hand, if they finance it with securities, the market could presume that they prefer to use securities, although they have excess cash, because the securities are overvalued (the substitution hypothesis). Consistent with these two hypotheses, we find that the association between excess cash and the market reaction to acquisition announcements is negative for both pure cash and pure noncash acquisitions. It would appear then that the managers of an average cash-rich acquirer have no good option - the market reacts negatively to an acquisition by the average cash-rich firm whether the acquisition is financed with cash or with securities. However, we find evidence suggesting that there is an optimal mix of cash and security financing that enables the average cash-rich firm to undertake acquisitions without eliciting negative market reactions, with the optimal mix tilted toward securities. The results also indicate that the market differentiates between acquirers that apparently opt for mixed financing as a means of distinguishing themselves and those that use mixed financing because of financing constraints.

The Determinants of Target Returns in European Bank Mergers

Announcement period abnormal returns for target banks are generally considered low compared to non-bank mergers. In this paper the factors that influence those returns in European bank mergers is examined. Sixty-seven deals from the EU, Norway and Switzerland are studied for which both targets and acquirers were listed companies (some of these being cross-border mergers and acquisitions), and find that European cross-border acquisitions tend to generate higher returns than national acquisitions. Cash deals and deals that are settled by a mix of cash, equity and loan notes create higher returns than equity transactions. It was also found that the target profitability and the relative asset growth rate have significant positive relation with the stock return. In addition, the significance of loan quality, the relative cost to income ratio and the ratio of loans to deposits, all point to the importance of efficiency in the European financial services industry.

Impact of Electronic Toll Collection and Electronic Screening on Heavy-Duty Vehicle Emissions

The proliferation of electronic toll collection (ETC) mechanisms such as E-ZPass has a positive effect in reducing automobile emissions at toll plazas because of decreased acceleration, deceleration, and idling events. Modeling tools such as the California Modal Emissions Model can be used to measure the emissions impacts of ETC and other electronic screening (e-screening) facilities only on light-duty gasoline-fueled vehicle operations. No such tools exist for modeling of the emissions impacts of ETC and e-screening facilities on heavy-duty vehicle operations. This paper presents a speed profile discretization (SPD) technique for modeling emissions at ETC and e-screening facilities. The SPD technique is based on the MOBILE6.2 method of representing vehicle miles of travel in various speed bins. The technique defines an emissions influence zone within which speed profiles are altered and further determine vehicle emissions. With this technique, the emissions impacts of heavy-duty trucks at the toll collection plaza on the George Washington Bridge in New York City are estimated. The current mix of cash and E-ZPass transactions on the George Washington Bridge are shown to reduce emissions of volatile organic compounds (VOCs), hydrocarbons (HCs), and oxides of nitrogen (NOx) within the emissions influence zone. The degree of reduction is dependent on the speed with which E-ZPass vehicles are processed. If E-ZPass vehicles are processed at no more than 10 mph, reductions in VOC, CO, and NOx emissions are estimated to be 30.8%, 23.5%, and 5.8%, respectively. Results indicate that if E-ZPass allows vehicles to be processed at 20 mph, reductions in VOC emissions due to truck traffic alone could be as high as 50%.

An Empirical Examination of the Factors that Influence the Mix of Cash and Oncash giving to Charity

Taxpayers are able to deduct from taxable income charitable contributions made in either cash or noncash forms. This study examines how the different tax prices of cash and noncash charitable gifts affect the mix of cash and noncash charity, using data from a balanced panel of taxpayers that allows panel data estimation techniques to account for any individual specific effects that may influence the mix of contributions. The article finds that taxpayers are quite responsive in their charitable giving mix to changes in the tax prices. An increase in the relative price of noncash to cash gifts leads to a significant decrease in the proportion of gifts in the noncash form, with an elasticity that often exceeds -1.0.

The Effect of Compensation Design and Corporate Governance on the Transparency of CEO Compensation Disclosures

We investigate the (i.e., the level of detail) of CEO compensation disclosures by Australian firms following regulatory changes in July 1998. After controlling for other possible economic determinants of disclosure, we find that transparency is negatively related to the level of size-adjusted compensation. We also find that transparency increases with firm size and (weakly) with performance. There is also evidence of a persuasion effect, in that disclosures made after the release of regulatory guidelines are more transparent. However, we find no evidence of specific corporate governance attributes (i.e., separation of the CEO and chair roles, auditor quality, board composition, the existence and structure of board committees) being associated with more transparent disclosures. Nor do we find any evidence of transparency being associated with the mix of cash and stock-based compensation. Although there is some indirect evidence of a negative relation between blockholder ownership and disclosure transparency, we find no significant relation with insider ownership. Overall, our results are consistent with corporate governance mechanisms having minimal impact on disclosure where there are potential conflicts of interest between the CEO and outside shareholders.

Money and credit as means of payment

A stochastic economic environment is presented in which the mix of cash and resource-costly credit used as means of payment is endogenous. For reasonable values of the credit cost parameter, velocity can be quite variable and sensitive to the nominal interest rate. Those parameter values also generate larger welfare costs of inflation than have been found previously and a sizable impact of inflation on real interest rates.

Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions.